Franchisees Back Price Cuts By McDonald's

By BARNABY J. FEDER

Published: March 1, 1997

CHICAGO, Feb. 28—
The McDonald's Corporation said today that its 2,700 domestic franchisees had voted overwhelmingly to endorse its plans for a nationwide promotion built around sharply discounted burgers and sandwiches and that the program would begin in 55 days.

''We still have a lot of details that we are working through,'' said Brad Ball, senior vice president for marketing for McDonald's USA, the company's domestic arm. ''The mood out there is extremely positive.''

That mood does not extend to Wall Street. While consumers may be salivating over the prospect of seeing a Big Mac purchased along with fries and a drink falling from nearly $2 to 55 cents, investors fear a price-cutting war could erupt, affecting the entire $100 billion fast-food industry. McDonald's stock fell another 25 cents today in active trading to end at $43.25.

Billions of dollars have been wiped off the value of McDonald's and other fast-food stocks since details about the discount plan, called ''Campaign 55,'' began to emerge on Wednesday with an article in The Wall Street Journal.

McDonald's officials and franchisees stressed today that the campaign, which harkens back to Ray Kroc's opening of his first McDonald's store in the Chicago suburb of Des Plaines in 1955, will include service improvements as well as discount pricing. But Mr. Ball and others denied reports that any agreement had been reached to include an ironclad promise of service within 55 seconds of an order being placed.

The unexpected publicity before the marketing promotion was completed exposed franchisees to a circus-like atmosphere as they weighed the company's proposals. The promotion was developed by the company in cooperation with a group of franchisees that coordinates national advertising, then presented to each of 40 regions. Company officials said the vote in every region was well above the 75 percent level required for franchisees in that region to participate in a national program.

Some industry analysts have said that investors are being unduly pessimistic. If the promotion actually steps up competition in the industry, they say, smaller chains like Hardee's and Checkers are more likely to suffer than the industry giants. Both Burger King and Wendy's enjoyed increasing sales after McDonald's introduced and heavily promoted its Arch Deluxe line last year.

But others said McDonald's faced new risks with Campaign 55. The promotion could generate losses rather than profits for franchisees if customers do not order high-margin items like large orders of fries and drinks with their Big Macs, or whichever sandwich replaces it as the promotion rotates through the menu over the next year. Others say customers could become reluctant to go back to regular prices after trying the promotion. And the promotion could be too successful for its own good.

''With 55 days to hype this, they should be able to get people in the door,'' said Gary Scudder, an operations research expert at Vanderbilt University's Owen School of Management who has studied the fast-food industry. ''But I'd be concerned about what's going to happen to their speed and consistency if they get enough people in.''

The dissident franchisees complained that discounting would increase the company's overall sales -- and the payments franchisees owe it -- without addressing the problem of crowding that many of them face. As McDonald's builds or franchises out more and more restaurants, existing operators are losing some of their business to others in the chain.

''It's good for McDonald's and it's good for customers, but it's not good for me,'' said Gerardo Perez, who sued McDonald's last year in Federal District Court in San Francisco in a dispute over the blocked sale of the restaurant he owns in Cameron Park, Calif.

He figures that sales at his restaurant will have to increase 15 percent to offset the revenue loss due to the discount. He is doubtful McDonald's can achieve that gain in market share. ''It's folly,'' he said. ''There's too much competition out there.''

Mr. Perez said that ''operators left to an uninfluenced vote would have voted it down,'' because the discount would hurt franchise operators' profit margins and would push marginal operators out of business.

A handful of franchisees in Northern California voted against the plan on Thursday, according to Charles R. Gonzales, 62, the operator of two San Francisco restaurants. Mr. Gonzales is suing McDonald's in Superior Court over age discrimination.

''A lot of them got up to speak their mind, but they are not willing to talk publicly,'' Mr. Gonzales said. ''This will hit them in the pocketbook. I think it's very unfair.''

In Denver, three franchise owners voted against the plan, according to one participant, who asked not to be identified. ''Ray Kroc would roll over in his grave,'' he said, referring to the McDonald's founder. ''Profits of the independent stores will decrease with discounting and more operators may elect to get out.''

''The company has changed,'' the Denver restaurant owner added. ''It used to be the operator had to be successful for the company to be successful. Their concerns are totally redirected toward stockholders.''

Most franchisees are more enthusiastic though. After six quarters in which sales at domestic stores open a year or more fell while those at rivals like Burger King and Wendy's grew, there had been widespread consensus within McDonald's that a range of drastic steps was needed. The changes have already included the elevation of Jack M. Greenburg over Ed Rensi as head of the domestic business.

McDonald's said that same-store sales had rebounded in the first two months of this year and that the new campaign would add momentum.

''McDonald's is on the right track and we're stepping on the gas,'' Mr. Rensi said.

Photo: McDonald's will cut prices at its restaurants, like this one in Philadelphia. (Associated Press)